LONDON - The Financial Services Authority (FSA) has published the Turner Review of global banking regulation. Lord Turner, chairman of the FSA, was asked by the Chancellor of the Exchequer to review the events that led to the financial crisis and to recommend reforms.
The review identifies three underlying causes of the crisis - macroeconomic imbalances, financial innovation of little social value, and important deficiencies in key bank capital and liquidity regulations. These were underpinned by an exaggerated faith in rational and self-correcting markets.
It stresses the importance of regulation and supervision being based on a system-wide 'macro-prudential' approach rather than focusing solely on specific firms. Among others, it recommends: fundamental changes to bank capital and liquidity regulations and to bank published accounts; more and higher quality bank capital, with several times as much capital required to support risky trading activity; counter-cyclical capital buffers, building up in good economic times so that they can be drawn on in downturns, and reflected in published account estimates of future potential losses; a central role for much tighter regulation of liquidity; and the regulation of 'shadow banking' activities on the basis of economic substance not legal form: increased reporting requirements for unregulated financial institutions such as hedge funds; and regulatory powers to extend capital regulation.
Lord Turner said: "A global market economy remains the best means of delivering global prosperity: it requires a global banking system focused on serving the needs of businesses and households, not in taking risks for quick return. Major changes in regulation and in supervisory approach are required to deliver that.
"The changes recommended are profound, and the banking system of the future will be different from that of the last decade. The world's economy will be better served as a result."
Published alongside the review is an FSA discussion paper that sets out more detail on specific policy proposals. As the current crisis arose in the banking, investment banking and 'shadow banking' sectors, most of these proposals focus on these sectors.
Click here for the Turner Review.
Click here for Discussion paper 09/2.